The ministry of corporate affairs (MCA) has floated a consultation paper seeking to review regulations of audit services and business with a view to enhance independence and accountability of audit firms. It will explore ways to check concentration of audit services with a few firms and to analyse its impact on economy.
"To solicit the views/ comments of other government departments and regulatory agencies on suggestions relating to amendment in existing law to enhance audit independence and accountability," the objective of the MCA paper states.
Elaborating on the rationale behind the paper states, "The concept of auditor's independence requires the auditor to carry out his or her work freely, with integrity and in an objective manner. Though auditor is appointed by shareholders, effective power of their appointment and dismissal lies with the management. Hence, time and again, audit independence has been questioned, as to whether the auditor is really doing justice to the interest of shareholders and is staying true to the audit profession. Also, the auditor's responsibility is not limited to shareholders, as audit report is a public document, relied on to by various stakeholders, including financial institutions, government and general public."
AMRG & Associates, chief executive, Gaurav Mohan said, "MCA has initiated a discussion in the right direction to enhance the audit independence and accountability, in wake of recent instances of audit lapses in several high profile corporate cases playing with public money. It also invited recommendations on economic concentration of large global corporations' assurance services with Big 4 accounting firms and impact thereof."
Broadly, the auditor's financial or other interest in client's business inappropriately influences his judgement or behaviour and a conflict of interest always exists, which may result in the auditor turning a blind eye to potential risk or at the extreme, ignore an impending/occurred fraud.
"There is self-interest threat due to reliance of auditor on the fee from the client. This is manifested in various ways and results in various negative consequences," MCA said in the paper. One of the issues which the paper intends to raise is the economic concentration of audit and its beneficent and maleficent effects on economy.
"The majority of large global corporations use the Big Four accounting firms for auditing their financial statements. Such audit market concentration of listed firms is characterised by an oligopoly of 'Big Four' audit firms and would result into inadequate degree of competition in large-company audits," it said.
There would be greater obstacles in finding a new auditor because of limited competition in many geographical markets where some of these firms do not have a strong presence as well as a lack of sufficient auditor expertise in particular industries by the remaining firms.
"Under this scenario, the auditors could be tempted to eliminate certain audit procedures to reduce costs, take on riskier clients, acquiesce to management’s demands, or aggressively expand their riskier non- audit services under the banner of a trusted audit firm brand, which would only increase the already continued high rates of audit deficiencies," it added. Accordingly, in the paper, the MCA has asked for views on what are the way outs to remove such economic concentration of audits.